COVID-19: Directors’ Duties in difficult times

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“I am a director of a UK limited company, what duties do I have?”

 

Directors are in a position of trust and depending on the circumstances, owe certain duties to the company, creditors and shareholders.

 

These duties fall under various statutes and case law.  In particular, section 172 of the Companies Act 2006 (Act) states that a director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

 

However, the meaning of “success” is unclear in the Act.  Therefore, the decision as to what will promote the success of the company, and what constitutes such success, is one for the director’s good faith judgment.

 

In fulfilling this duty, a director must regard (amongst other matters):

 

  • the likely consequences of any decision in the long term
  • the interests of the company’s employees
  • the need to foster the company’s business relationships with suppliers and others
  • the impact of the company’s operations on the community and the environment
  • the desirability of the company maintaining a reputation for high standards of business conduct
  • the need to act fairly between the members of the company

 

The list of factors, which directors are required “to have regard to” is not exhaustive.  In addition to the factors listed, the duty to exercise reasonable care, skill and diligence will apply. However, this list is rather onerous for directors to adhere to and may expose directors to personal liability.

 

“What do I need to be aware of specifically in the current situation?”

 

Where a company is threatened by insolvency because it is unable to pay bills as they fall due or its liabilities are greater than its assets, in addition to the duties already mentioned, there are modified, and additional duties imposed on directors:

 

  1. Duty to promote the success of the company

 

The general duty to promote the success of the company is modified so that the directors must act in the best interests of the company’s creditors. A director may find themselves personally liable for any loss suffered by creditors as a result of a breach of any of their duties.

 

  1. Wrongful trading

 

If a director allows the company to incur liabilities or worsen the position for creditors, when they knew or ought to have known that there was no real prospect that the company would avoid insolvency, a director could be required by the court (on the application of the liquidator) to contribute to the company’s assets to compensate the company for the losses sustained and/or be disqualified as a director.

 

When deciding what a director knew or ought to have known, the court will consider what a reasonably diligent person, with the level of knowledge, skill and experience reasonably expected of a director, would have known or concluded (an objective test).

 

The court would also consider if a reasonably diligent person, with the general knowledge, skill and experience that director has, would have known or concluded (a subjective test).

 

There is a defense if a director has taken every step to minimise the loss to creditors.  Timing wise, a director is liable from the point in time that they ought to have known (considering the above tests) there was an issue.

 

Practical steps – “How can I mitigate the risks?”

 

  1. Keep up to date with your current company financials and review regularly (for some this may be daily).
  2. Hold regular board meetings (check your articles to ensure these can be done remotely) and keep detailed board minutes of decisions made, taking into consideration your directors’ duties.
  3. Be mindful of potential conflicts of interest (especially if you sit on a number of group company boards).
  4. Seek advice from an insolvency practitioner and lawyers to help navigate you through this
  5. Talk to your existing lenders and other stakeholders (e.g. landlords, suppliers etc.) to see what assistance they are willing to provide.
  6. Ensure you are able to continue trading.

 

If you or your board need any further advice or assistance on what you should be doing to mitigate your personal liabilities, please contact Kelly Jordan at [email protected] or Amy Wanless at [email protected] or call 0191 211 7777.